Markets & Finance

Economic Growth Picks Up

July 30, 2003

The 2.4% growth rate for U.S. gross domestic product in the second quarter (vs. 1.4% growth in the first quarter) was stronger than we at MMS International expected, and even stronger than the consensus, with several component surprises that also contributed to an optimistic set of data for the economy.

Consumption posted the 3.3% growth rate in the second quarter that we had estimated, and both government spending and equipment and software spending grew at the 7.5% rate we warned about. But beyond these solid figures that we had largely expected, we saw a surprisingly strong set of construction spending figures that diverged dramatically from the construction source-data, alongside a shortfall in imports from our high estimate and a dramatic downside correction in inventories.

Residential investment grew at a 6.0% rate despite the 8% downside "correction" that was revealed in the monthly reports. Commercial construction grew 4.8%, instead of falling by this amount. Net exports subtracted $43 billion with an expected 3.1% rate of decline in exports but "only" a 9.2% growth rate for imports that we do expect to be revised upward.

These huge upside spending surprises were offset by a hefty $23 billion second quarter business inventory subtraction that will likely be quickly reversed in the second half. In total, the data bode very well for the third and fourth quarters.

Chicago PMI Rises

The July Chicago-PMI jumped to 55.9 from 52.5. The July reading was much stronger than expected and follows upside strength that has already been evident in other related manufacturing reports (New York Fed's "Empire State" survey, Philly Fed, durable goods orders).

This strength suggests upside risk for tomorrow's ISM manufacturing survey, prompting us to revise our forecast to 53.0 from our initial forecast of 50.5. Moreover, the data also clearly support the view that factory sentiment and activity is finally beginning to lift, thanks to all the stimulus in the pipeline, which has already prompted a notable change in credit and equity markets over the last few months.

As for the components, new orders jumped to 61.7 from 54.8, production increased to 58.4 from 56.5, and employment rose to 46.0 from 43.8. On the inflation front, prices paid slipped to 47.7 from 49.1, which left the series at the lowest level since January of 2002.

Overall, manufacturing is finally showing some post-war improvement following disappointing growth throughout the first-half of the year, which bodes well for the second-half of the year. The more controversial question still weighing on the markets is how much of an improvement is already priced-in.

Employment Costs Inch Up

The U.S. employment cost index (ECI) rose 0.9% in the second quarter, compared to an unrevised 1.3% rise in the first quarter and a shade below consensus forecasts of a 1.0% result.

Second-quarter wages and salaries rose a tame 0.6%, vs. 1.0%, while benefit costs gained 1.4% compared to +2.2%. Overall the benign inflation scenario may be overshadowed by the dip in jobless claims and rise in GDP. From MMS International